Is Delta Falling for the Vertical Integration Fallacy?
It certainly looks like it, as I discuss in my latest Bloomberg View column. Here's the opening:
When I saw that Delta Air Lines Inc. (DAL) is negotiating to buy an idled Pennsylvania oil refinery in hopes of saving money on its fuel bill, I had a flashback to July 7, 1981.
Back then, I was an intern in the now-defunct Philadelphia bureau of the Wall Street Journal, and DuPont Co. had just announced its agreement to buy Conoco Inc. for about $7 billion in cash and stock. At the time, it was the largest corporate merger in history.
Our little bureau mobilized to cover the story and, as the least knowledgeable of the crew, I was given the simplest job: Call a bunch of Wall Street analysts and ask them what they thought. It was an especially easy assignment, because they all said the same thing. Buying an oil company was a clever idea, they told me. It would give DuPont (DD) a reliable supply of oil for its petrochemicals and protect the company from price increases.
The market disagreed -- DuPont's stock price went down on the news -- and the conventional wisdom soon changed. (DuPont finally spun off its Conoco division in 1999.) But in those early hours, everybody I talked to thought the merger was a smart move. And, because I was a naive intern, I believed them.
Vertical integration fools a lot of people.